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View Diary: Microcredit: be a Venture Capitalist. (185 comments)

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  •  why microcredit works (none)

    There is a huge difference between the payday loan places and microcredit. Payday loan places basically exploit people who already can't make ends meet. They often end up needing to take out more payday loans to pay for the interest on the previous ones.

    I first heard about microcredit on a 60 minutes show many years ago. In many cases, the loans were made to allow workers to purchase the tools and initial materials they needed to do their existing jobs working for themselves instead of being exploited. The employers were providing the tools but charging inflated rents on those tools or just paying so little per piece that the workers could never afford to buy tools. Very similar to being charged inflated rent to live in the company provided tar paper shack and having to buy your food at the company store and being paid a wage that is so low that you can never afford the transportation expenses to leave. When people are being exploited, it is very easy for microcredit to work. In some cases, a single days work brought in enough income to pay for the tools needed. The resale value of the goods produced in a day might be a years wages (don't remember the actual ratio). This applies to the original microcredit loans in Bangladesh where the people were extremely poor and extremely exploited. Microcredit has expanded into giving loans where the returns may not be as dramatic.

    Microcredit loans typically only go to buying resources that can provide income. Not luxuries, not filling in for cash flow problems. Part of the problem in the US is that people have been encouraged to borrow money for unnecessary items. It is also much harder to start a business in the US. And the degree of exploitation is lower so payback times are longer.

    An interesting twist that might make sense in the current US economy would be to fix the loans in the currency of the other nation. No interest would be paid but if the dollar weakens it could be an actual investment or at least hedge for people in the US who are thinking about hedging by investing in foreign currencies. Underdeveloped nations, less dependent on petroleum, might be less affected by the energy crisis (or they might be affected because export markets dry up). But it might work out that from the borrowers and lenders perspective that the loan is repaid at constant value. If the dollar drops, tieing the loan to US currency might be a windfall for the borrower, and thus more charitable, but on the other hand this might be a way to make more loans availible. And it might be a way around SEC regulations since there is no actual interest, you have just changed the denomination of the loan.

    Here is a small credit idea for the US - a relatively inexpensive side business, by US standards, with significant potential for leveraged social returns. I think it could work in a lot of communities but those affected by the hurricanes would be an excellent place to start. Spend $5000 to buy a trailer with power and hand tools. Using a concession trailer with windows might be good since bench power tools could be set up in a fixed location and lumber could extend outside the trailer (must lock securely, though. Rent it for $100 per week or $25/day. Organize the tool drawers so you can very quickly tell if any tools are missing. People could rent it instead of buying tools and equipment for purposes like making furnature, build houses or additions, etc. More than one family could even share the use of the trailer at the same time. No real estate is needed except a place to park the trailer when it isn't rented and in many cases that is free. If there was sufficient money to invest, one could send a large number of these into hurricane areas and then after the area was rebuilt they could be redeployed to other communities. Community local shop trailers could be loaned to disaster areas. The biggest variable is the cost of theft or loss. Typical tool rental businesses seem to charge about 1/3 of the purchase price for a tool. This is one variation on the community shop idea. I remember having access to community shops when I was an army brat. On a larger scale, basically imagine rougly duplicating a high school shop and selling memberships (compare to a fitness club). This is efficient because it eliminates waste (both money and natural resources) spent on tools that are rarely used. And it has high leverage in terms of doing social good. Many small houses could be built using the labor of the occupants and their friends and neighbors (still need land and materials). Many home improvement projects (including energy related ones such as insulation, solar, etc.) could be facilitated.

    •  fixing loans in other currencies (none)
      An interesting twist that might make sense in the current US economy would be to fix the loans in the currency of the other nation.

      What you're describing is essentially a form of currency trading. Take the loan out of it for a second, and imagine that you just converted USD (US dollars) into UGX (Ugandan shillings) and held it there. After a while the dollar dropped and you converted back. You wind up with more dollars than you had before.

      Unfortunately for that scheme, though, we report income and pay taxes in US dollars.

      The IRS doesn't care that you started with 1000 UGX and ended with 1000 UGX. It cares about the value in USD. When you wind up with more dollars than you had before, that's a profit that must be reported. (And as a corollary, it means Kiva would be trading securities and would have to report to the SEC, etc).

      A for-profit-microloan system that is already reporting to the SEC would be able to do that, but that's not what Kiva is...

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